Bank of Israel Governor says if it is necessary to increase expenditure, it should be accompanied by tax increase.

Bank of Israel Governor Stanley Fischer has challenged Finance Minister Yuval
Steinitz on next year’s budget, declaring the need for more tax hikes to reduce
the deficit.

Speaking at a Bank of Israel conference in Jerusalem on
Wednesday, he said in an ideal world the government would meet the deficit
target and reign in expenditure. But if it is necessary to increase expenditure,
Fischer said, he would prefer it be accompanied by a tax increase to bring the
deficit below 3 percent.

If the government is forced to choose, it should
raise the spending limit instead of increasing the deficit, he said. The law
limiting the yearly increase in government spending can be amended, and this is
better than raising the deficit next year, he added.

The Bank of Israel
expects the Israeli economy to grow 3.8% in 2013, taking into account the impact
of natural- gas production from the Tamar offshore field, which is expected to
go online in the second quarter. Should tax rates remain at current levels, the
central bank estimates the deficit will stand at 3.5% next year – above the 3%
target rate.

Fischer emphasized the urgency of dealing with the deficit,
saying it will be even more difficult to deal with it later on if the economy
slides into an unexpected recession.

“It is advisable not to delay such a
decision,” he said. “Tensions within the government only increase when decisions
are postponed, and it would be preferable for the next government to make these
decisions at the beginning of its term.”

Finance Minister Steinitz on
Wednesday told Army Radio it is unlikely a Likud-led government would impose
fresh tax hikes next year, saying that “as it appears now, we have already
imposed enough taxes.”

Fischer, despite his urgent tone, praised the
current government for maintaining a commitment to reducing the rate of
expenditure to GDP.

The commitment was introduced in 2003, when Prime
Minister Binyamin Netanyahu was responsible for the Treasury, he
said.

Fischer said that the government has made commitments for next year
that amount to a 10% increase in spending, double the increase permitted under
the current fiscal rule.

Israel’s security situation has worsened
considerably, and this also needs to be taken into account, he said.

“To
convince people in a democracy to get less than they want to get isn’t easy,” he
said. “This is the work of politicians, and it isn’t work that I would consider
pleasant, but someone has to do it, and they volunteered.”

The defense
budget now stands at just 6.5% of GDP, a dramatic fall from the days after the
Yom Kippur War in 1973, when it stood at 35%, and even lower than the US defense
budget at the time of the Korean War in 1950- 53, Fischer said.